MINUTES OF EVIDENCE

TAKEN BEFORE THE COMMITTEE OF PUBLIC ACCOUNTS 
MONDAY 18 NOVEMBER 2002

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Members present:

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Memorandum submitted by the Department for Transport

1.  The Committee is due to take evidence on 18 November on the Report by the Comptroller and Auditor General on the Public Private Partnership for National Air Traffic Services Ltd (NATS) (HC 1096, Session 2001-02).

2.  Part 3 of the Report sets out the position on NATS' future financing as it stood at the time of publication in July 2002. Since that time, there have been significant developments towards the strengthening of NATS' financial structure. The Committee may find it helpful to have this supplementary note.

3.  Paragraph 3.32 refers to an application by NATS to the Civil Aviation Authority (CAA) as its economic regulator for a relaxation in the cap on NATS' charges to airlines, to reflect the reduced level of air traffic since the unprecedented events of 11 September 2001. NATS also sought other regulatory changes designed to give greater certainty about its income base in the remainder of the first five-year charging period and into the second. The application was part of a composite solution being developed by all the parties-NATS itself, its shareholders, a potential new private sector investor and NATS' lending banks.

4.  Consideration of that application by the CAA has continued. Following the CAA's initial reaction in May 2002 noted in the report, NATS made further submissions to the CAA in June and September 2002. Discussions have continued in parallel on the composite solution.

5.  NATS' confirmed in September that, as part of the composite solution, new investment had been offered on the lines set out in paragraph 3.38 of the Report. BAA plc was prepared to invest £65 million, partly as new equity and partly as debt. The Government was prepared to match an appropriate private sector investment on the same terms, and the composite solution would also involve some adjustment to the terms of the banks' lending to NATS.

6.  The CAA issued a consultation paper to users about the regulatory changes sought by NATS on 17 October 2002. It indicated that it was minded to grant the changes sought by NATS, on condition that they would be part of the wider solution designed to secure a robust future for NATS and an equitable contribution from all parties. The CAA commended the proposed changes to users as a basis for reliable service provision in the future. The consultation period ends on 14 November, and the CAA will announce its conclusion thereafter.

7.  If the CAA grants the relaxation sought by NATS, the value of X in the RPI-X charge setting formula will be two in each of 2003 and the following two years (instead of four in 2003 and five in the following two years as fixed at the outset of the PPP). This means that NATS will still be achieving real terms reductions in prices each year, and so reducing the cost of air traffic control services to airlines and thus ultimately to the travelling public. The CAA also proposed that NATS should no longer be exposed to the full risk of traffic fluctuations, and that a mechanism should therefore be introduced whereby NATS' prices would change if traffic differed from the levels forecast.

8.  The Department welcomes the CAA's proposals, which it believes to be a firm foundation for NATS to plan ahead for safe and even more effective service delivery, and to expand to embrace other opportunities- particularly under the Single European Sky-as they arise. The Department is playing its part in seeking to complete the arrangements as quickly as possible.

5 November 2002